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McDonald's and KFC Are Going Head-To-Head

A look at McDonald's and KFC. How do they compare and which one is better for your portfolio?

As one travels through Asia there's a constant presence, and that's McDonald's (NYSE:MCD). Typically, across from a McDonald's restaurant there is a KFC. Sometimes there's also a Pizza Hut in the neighborhood. Both KFC and Pizza Hut are part of Yum! Brands (NYSE:YUM). The problem for Yum! Brands is that simply by looking at the KFC and Pizza Hut locations, both lack the number of customers seen at McDonald's.

Still the market leaderThere's no denying the global footprint of McDonald's. Each day, the company serves more than 69 million customers in more than 100 countries at its approximately 35,000 locations. Last month, global comparable sales rose 0.5%. The strongest region was Europe, which posted a 0.8% increase, followed by the U.S. at 0.2%. The weakest region for McDonald's was the Asia/Pacific, Middle East, and Africa. This region posted a comparable sales decline of 2.8%.

The weakest region in Asia was Japan. McDonald's needs to accelerate its breakfast offerings in this market. Outside of Asia, breakfast remains a strong and profitable time of the day for McDonald's. Typically, most Asian consumers don't opt for a breakfast like Americans and Europeans do, but McDonald's can work to change that with its McCafes and increase its marketing to boost sales during this part of the day.

McDonald's is taking several steps to spur growth across all its stores. For instance, McDonald's is looking to challenge Starbucks and Dunkin' Brands in the coffee market. While some think McDonald's should focus on its hamburgers and improving its menu offerings, I think this is a good move. Drinks get customers in the door and get them to possibly purchase other items off the menu. McDonald's is also partnering with Kraft and it will begin selling packaged McCafe coffee at retail outlets next year.

Secondly, McDonald's is working on upping its Dollar Menu. The new "Dollar Menu & More" will have items that go as high as the $5 mark. I think this is a good move because the company needs to get its customers spending more per visit and not just purchasing the less expensive items on the Dollar Menu. The one area McDonald's does need to improve upon is coming up with a new blockbuster menu item like Wendy's Pretzel Bacon Cheeseburger or Taco Bell's Doritos Locos Tacos. A new product would really spur sales at McDonald's.

Showing signs of improvementYum! Brands gets most of its business from China. KFC was the first Western fast-food chain to set up in shop in China in 1987, and today KFC has more than 4,200 restaurants in 850 cities across mainland China. Originally, KFC offered its famous fried chicken along with American cachet. Over the years, KFC has opted to offer more local dishes and appeal to the tastes of local Chinese. I think this has backfired for the company and explains why there are more customers at McDonald's than at KFC locations. Locals go to McDonald's partially because they want a taste of Western culture and McDonald's is pretty much consistent with its menu offerings globally.

In October, same-store sales for Yum! in China fell 5% year-over-year. This was a big improvement from the 11% decline posted in September and the 10% drop in August. The problem for Yum! and KFC in China has been concerns over poultry safety. Worries among the Chinese population about another outbreak of bird flu are enough to keep customers from eating chicken. I think these fears will eventually die down and October's results are a sign that the company is seeing some relief of those fears.

Going forward, Yum! continues to focus on global growth--in fact, the company just opened its 40,000th restaurant in India. In India, Yum! aims to have 1,000 restaurants in more than 100 cities by 2015. The 1,000 restaurant goal will consist of KFC, Taco Bell and Pizza Hut locations. These restaurants are forecast to contribute over $1 billion in sales when fully operational in 2015. Overall, Yum! plans to invest $10 billion in emerging markets with the goal of having 20,000 restaurants in emerging markets by 2020.

Foolish assessmentFor investors, shares in McDonald's have been the better bet. In the past year, shares of McDonald's have risen 16% versus a 2% rise for Yum! Brands. McDonald's also pays a better dividend with a yield of 3.3% compared to 2.2% for Yum! Brands. In terms of valuation, McDonald's wins on that basis as well. McDonald's trades at 16 times next year's earnings, whereas Yum! Brands trades at 20 times next year's earnings.

I think McDonald's still looks to be the best bet among the two chains. Yum! still has its troubles in Asia and that is evident both from its weak same-store sales and simply by looking at its locations. Customers continue to flock to McDonald's where they can get a piece of Americana and don't have to worry about bird flu. For investors, the 3.3% dividend yield from McDonald's is certainly the better deal.